Dark Money Group Sues IRS Over Targeting, Disclosure

Posted on Apr 30, 2014

A conservative nonprofit sued the Internal Revenue Service Monday because the agency targeted it for extra scrutiny and disclosed the group’s application for tax-exempt status to ProPublica.

The group, Freedom Path, was launched by backers of Utah Sen. Orrin Hatch and ran ads supporting Hatch and other Republicans in 2012.

Freedom Path is one of dozens of social welfare nonprofits, also known as “dark money” groups, that have dumped hundreds of millions of dollars from anonymous sources into direct election ads and indirect ads that criticize or praise certain candidates since the Supreme Court’s Citizen United ruling in 2010.

The groups are allowed to spend money on election activity, as long as they promise that social welfare, and not politics, is their primary purpose. The nonprofits don’t have to report their donors, raising concerns about possible corruption.

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Freedom Path’s lawsuit, filed in federal court in Dallas and sparked in part by IRS revelations last year that it targeted conservative nonprofit applications for a harder look, claims that the group suffered damages from responding to the IRS requests for more information on its application to be recognized as a tax-exempt social welfare nonprofit.

Freedom Path, formed in 2011, was one of many conservative groups with applications flagged by the IRS, using key words like “Tea Party” or “Patriot” or phrases like “limited government.” Since the IRS’ May 2013 admission that it targeted the groups, several Tea Party groups have also filed lawsuits that some experts have given little chance of prevailing.

In its lawsuit, filed against the IRS and agency officials, Freedom Path also said it was damaged by the IRS releasing its pending application to ProPublica.

In November 2012, the IRS sent ProPublica nine pending applications of conservative groups, in response to a ProPublica request for applications of 67 different nonprofits. Applications are supposed to be confidential until the IRS recognizes a group. Despite a Treasury Department and congressional investigations, no one has publicly determined why the pending applications were mailed.

As part of the damages claimed by Freedom Path, the group said it “suffered actual damages in the form of legal fees associated with its communications with Defendant IRS and ProPublica, as well as public relations costs associated with the news articles resulting from the disclosure.”

After redacting financial information, ProPublica published Freedom Path’s pending application, along with those of five other groups that understated their planned political activities.

In its application to the IRS, Freedom Path checked “no” to the IRS question asking whether it planned to spend money to influence elections. It said it planned to spend 90 percent of its effort on doing “public education and outreach programs intended to inform the general public about current issues that may impact them, and to promote certain nonpartisan causes.” Freedom Path also said it would spend 10 percent of its effort on giving out grants.

In its lawsuit, Freedom Path downplays what it initially said in its application, saying that allegations it misstated its activities on tax documents “are unfounded.”

The IRS still hasn’t recognized Freedom Path as a tax-exempt nonprofit, the lawsuit says.

An IRS spokesman told ProPublica that the IRS does not comment on pending litigation and federal law prohibits the IRS from discussing any particular taxpayer situation or case.

Lloyd Hitoshi Mayer, an expert in nonprofit tax law at the University of Notre Dame law school, said that Freedom Path’s biggest chance to prevail in its lawsuit was for its claim about the disclosure of its pending application.

Another group sued the IRS over releasing its pending application to ProPublica, but ProPublica never published that application because the group told the IRS it planned to spend money on politics.

Since the Supreme Court’s Citizens United ruling, many new groups have exploited gaps between the IRS and the Federal Election Commission, which requires political committees to report their donors. ProPublica has documentedextensively how some of these groups have managed to skirt the rules.

Freedom Path is a case in point, showing how the groups can tell the IRS one thing, then do another, and how closely some of the groups are associated with political operatives or certain causes. Freedom Path also illustrates why knowing who is behind a dark money group might be important to voters — before the election.

Lawyer Chris Gober, who’s helped launch several conservative social welfare nonprofits, formed Freedom Path in January 2011. Gober, Mark Emerson and J. Scott Bensing were on the group’s board of directors. Emerson, a longtime Republican operative, once worked to elect Hatch as the leader of the Utah Republican Party. Bensing is a Republican consultant who once worked with Hatch on the National Republican Senatorial Committee.

Although Freedom Path’s donors are confidential, other records released after the 2012 election give clues of who was behind the group. Tax returns from the pharmaceutical industry’s leading trade association, the Pharmaceutical Research and Manufacturers of America, or PhRMA, show that it gave $1million in 2011 and 2012 to Freedom Path.

Freedom Path received a total of almost $1.58 million those two years, tax returns show. That means that about 63 percent of the group’s revenue during that time came from PhRMA.

Hatch has been a longtime supporter of PhRMA. PhRMA has been a longtime supporter of Hatch.

The fact that PhRMA was Freedom Path’s biggest supporter was not disclosed until PhRMA listed the donations in its tax filings — the first was released months after Hatch won a primary in which Freedom Path ran $300,000 worth of ads directly supporting the senator. Initially, a more conservative candidate was thought to have a chance at winning the party’s slot.

Freedom Path also spent another $160,000 on an indirect TV ad praising Hatch, Utah Republican Sen. Mike Lee and Republican presidential candidate Mitt Romney that was reported to the FEC. In its lawsuit, Freedom Path said the IRS deemed the ad to be political, but argues that the ad wasn’t.

The group also spent an unknown amount on an ad in early 2012 urging the repeal of the Affordable Care Act and telling people to call Hatch and tell him to “keep leading the fight!” That ad didn’t have to be reported to the FEC. In its lawsuit, Freedom Path again says the IRS deemed the ad to be political, but argues that it wasn’t.

On its 2012 tax return, Freedom Path said it spent almost $740,000 to “educate the public through research, polling, advertising, website and issue advocacy communications about public policy issues.”

The Freedom Path lawsuit also challenges the test used by the IRS to determine whether advertisements are considered political, saying that it is “unconstitutionally vague and ambiguous” and conflicts with an earlier Supreme Court ruling on issue advocacy groups.

That test, known as the “facts and circumstances” test, basically means that if an ad walks and talks like a political ad, it’s a political ad. It has long been criticized by some campaign finance watchdogs, liberals and conservatives for being too vague. Others say the test gives the IRS the leeway to use common sense to determine whether a particular ad qualifies as election intervention.

Experts said it was unlikely that Freedom Path would prevail in its lawsuit. Many IRS rules on nonprofits rely on subjective, facts-and-circumstances tests, said Marcus Owens, a lawyer who used to run the IRS Exempt Organizations’ division.

“The question is whether that sort of economic transaction — the speech — should be exempt from tax,” he said, adding that freedom of speech was not the issue in the case. “The speech can occur. That’s the key thing here, the speech can occur.”